Wednesday, April 28, 2010

The Cost of Housing and Jim Flaherty

As mortgages rates rise, Canadians should think of Jim Flaherty and the Conservatives.

After all, it was the Conservatives who extended the mortgage amortization period from 25 years to 40 years, reduced the needed down payment on second properties from 20% to 5% and allowed for 0 down on one's primary residence.

The Conservatives said their actions would promote home ownership. Theoretically this is true. Given growing consumer debt levels and the ever growing number of Canadians without pensions allowing Canadians to forgo a down payment and to take on a longer term mortgage was not exactly sound public policy, but on paper doing so should have freed up more people to buy. As the Toronto Star pointed out, longer amortization periods held out the promise of lower payments.

"Let's look at some numbers to prove the point, using a mortgage of $350,000 at an interest rate of 6.45 per cent, which was recently the posted rate at Scotiabank for a five-year term.

Paid back over 40 years, the weekly payment would be $465 and the total interest cost $597,000 – much higher than the value of the mortgage itself. That pushes the total cost of buying your house close to $1 million.

Shrink the payback to 25 years and the weekly payment rises to $538, but the total interest falls to $343,000, slightly less than the value of the mortgage."

The problem was that the prospect of lower payments was wiped out by the fact that the effect of such mortgage "innovation" was to heat up an already red hot housing market. Oh well, at least those who might have taken on a 25 year mortgage had prices not gone completely berserk since 2006, can console themselves with this; they pay less each month on their 35 year mortgage then they would on 25 year mortgage. With interest rates about to rise that really means something in the short term. All it cost in the long term was hundreds of thousands of dollars.

Since the crash, Flaherty has reduced the amortization period to 35 years, mandated 5% down payment on primary residences and again manadated that 20% be put down on second priorties. Flaherty had the chutzpah to claim these actions prudent, but what he did was akin to peeing on the rug and then to try to make amends by leaving it out in the hot sun to dry. The rug will dry, but the stink remains.

Sunday, April 18, 2010

Democracy is Hurt by Senate Reform

Constitutionally senators have all kinds of power and every once in a blue moon the Senate has stalled major pieces of legislation (e.g., free trade and the GST). However the aformetioned instances of stalling are so rare they are the exceptions that prove just how "ineffective" the senate truely is. Moreover, no senate I can think of has pursued a legislative agenda of its own accord; opposing legislation is one thing; purposing legislation is quite another. The reason the senate is not an "effective" body is that senators are not elected and as such lack legitacmacy. Furthermore, senators are members of legmitate federal political parties and the parties that they belong to are loath to have their unelected members excersise real authority least their actions undermine the party. Finally, the fact that it is the ruling federal party and not, say, provincial governments that appoint senators defines a clear pecking order, with the Senate answerable to the House.

Harper, of course, wants to reform the Senate. Being unable to reform the Senate in one fell swoop, Harper has proposed electing Senators piece meal. Under the Conservative plan, new senators would be elected and would be limited to serving out a 8 year term. The elephant in the living room is that if the senate's lack of effective powers flows from the senate's lack of legitamcy, then electing senators might provide the senate with a degree of legitmacy it currently does not hold. One problem with proceeding thusly is that current senators are free to serve until the age of 75. As a result, Harper's actions could either transform an unelected political body with no real power into a largely unelected political body with real political power or commit Canadians to the farcical and expensive act of electing people to office who hold no real power. Always content to play the Tin Man and Lion to Conservatives scarecrow, the Liberals remain largely mum on the subject.

Setting aside problems associated with implemenation, is the cause of democracy even served by reforming the Senate? Well, the Reformers always held that the regions needed more say and an “equal” “effective” and “elected” senate is the best way of achieving a balance between population centers in Eastern Canada and the rest of us. However, such a conception, and for that matter an "effective" version of the current senate, does not stand up to scrutiny. The problem is fivefold.

First such an argument rests on a false contrast; seats in the House of Commons are supposed to be assigned on basis of population, but in actuality that is not the case. Consider the 905. There are currently 4 plus million living in the 905 and there are currently 32 seats for an average of just over 127,000 people per riding. There are 6 ridings with over a 140,000 people in the 905, Bramalea - Gore - Malton (152,698) Brampton West (170,422) Halton (151,943), Mississauga - Erindale (143,361) Oak Ridges - Markham (169,642) and Vaughan (154,206). By contrast there are 4.5 million people in Sask, Man, NWT, Nuv, Yuk, PEI, NS, NFLD, and NB and there are 62 seats for an average of 72,000 people per riding. Moreover, there is but one riding in the 9, Selkirk Interlake (90,807), with over 90,000 people. Given current growth trends, there will be more people in the 905 than the aforementioned provinces and territories by 2011. Given population growth, Harper would have to give Ontario alone another 70 seats to make things half way equal.

Second, the people living in Canada’s less populated provinces have a mechanism to assure that regional concerns are addressed; it is called provincial jurisdiction and provincial representation. By the very nature of living in a province with a small population, the 135,851 people in PEI have plenty of ways of addressing regional concerns that are not available to, for example, the 136 470 people living in Mississauga - Brampton South.

The third reason is that while one person one vote is bedrock principle of any democracy, one province one senate vote is something else entirely. People, not provinces, deserve equal reprsenation. A province is no more or less than the people that make up that province. Giving the 135,851 in PEI the power to determine everything under provincial jurisdiction, provincial representation and 4 MPs well all the while giving the 170, 422 residents of Brampton West one MP is bad enough as it is. Piling on and giving the 135,851 people in PEI the same number of “effective” senators, as per the American Triple E Senate model, as 12,160,282 Ontarians is beyond stupid and grossly undemocratic. Equally silly is having one "effective" Senator for every 72,997 New Brunswick residents (10 senators in total) versus one Senator for every 685, 581 BC residents (6 senators in total). And that is what the current configuration gives us.

Four, as Benjamin Franklin put it, having two equally matched houses makes as much sense as tying two equally matched horses to either end of a buggy and having them both pull. Having two houses is not only a lobbyists dream, it is a recipe for political gridlock and pork barrel politics. The only thing that would be worse is if one needed 60% of the votes in the senate to overcome a filibuster.

Five, leaving aside the fact that no province has a second chamber, most having abolished them long ago, and that there are numerous examples of unicameral nation states (e.g., New Zealand, Denmark, Finland, Israel, Sweden, Iceland, Liechtenstein, South Korea and Portugal), we already have a de facto unicameral state as it is -- just ask the supporters of a Triple E senate. After all, one can not argue on the one hand that the current senate is undemocratic and so contributes to the "democratic deficit" and on the other hand argue that the senate is “ineffective”. A body that adds nothing to the genuinly "effective" process can not take away anything either.